Visa CEO Alfred Kelly is upbeat about the card network.
Michael Nagle/Bloomberg
Many stocks are thriving on a reopening trade, but not Visa. Investors aren’t buying that the card network will be a post-pandemic winner. They’re turned off by a lackluster outlook coupled with a tougher regulatory and competitive landscape, including new threats to the company’s debit business.
The company’s latest quarterly results weren’t bad; the numbers beat consensus revenue and profit estimates. But guidance for “high teens” revenue growth in the second quarter was lighter than expected. The swing factor, as Visa told investors, will be cross-border travel, and it’s recovering slowly in patchwork fashion around the world.
Visa (ticker: V) stock, a component of the Dow Jones Industrial Average, has been a laggard this year. It’s up 4.4% versus 13.6% for the Dow and 12.7% for the S&P 500. It’s also behind over the last 12 months, gaining 23% versus 45% for the broad market.
Cross-border travel transactions are crucial for Visa’s profit recovery. The transactions are almost pure profit for Visa—and Mastercard (MA). Wolfe Research analyst Darrin Peller estimates that Visa earns 20 basis points, twenty-hundredths of a percentage point, on domestic transactions versus 100 to 200 basis points on cross-border travel because of currency conversion fees and other charges. “It’s extraordinarily high margin and by far their most lucrative transactions,” he said.
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Visa CEO Alfred Kelly struck an upbeat tone on the recovery and other aspects of Visa’s business in a call with Barron’s last week. “We’re at the beginning of the end of the pandemic and the beginning of a recovery in many markets,” he said.
Visa is seeing gains in cross-border travel transactions, though not enough to satisfy investors. Cross-border transaction volume outside Europe improved 12% sequentially from the first quarter, the company noted in its latest earnings presentation. Much of the improvement, however, was driven by higher spending per card, rather than more active cards, a sign that a broad-based recovery has yet to kick in.
Visa stock faces other headwinds. Market leadership is shifting from growth to value and cyclical stocks that benefit more from the early stages of an economic recovery. That dynamic is compressing price/earnings multiples for growth stocks, noted Peller, and companies like Visa aren’t raising estimates enough to compensate for the multiple compression.
The market is also nervous about rising interest rates. That dynamic has lifted banks and other financial stocks that benefit from a steeper yield curve. Visa is classified as a tech stock. But there’s some overlap in the investor base, and Visa is ailing as hedge funds and other large investors shift out of tech and into financials, Peller said.
Investors also may be concerned about stiffer regulatory scrutiny of Visa’s debit business. The Justice Department opened an antitrust investigation into the company’s practices in March. And the Federal Reserve announced Friday that it’s seeking public comment on potential rule changes for debit that could open the market to more independent debit networks for online transactions.
Federal rules requires at least two unaffiliated debit networks to be enabled on a debit card, but the Fed says independent networks often aren’t available for online transactions because card issuers, such as banks, don’t enable them. Visa holds a commanding position in online debit and could face more competition if the Fed’s proposed rule changes go through.
Kelly maintained that Visa’s debit practices fully comply with the law and that the company is cooperating with the investigation. “It’s not usual to have an inquiry from the government—it’s part of doing business,” he said. “There’s huge competition from different debit networks. We believe we’ll work through this with the government.”
Also weighing on the stock are concerns that Visa could be cut out of online payments and peer-to-peer transactions as those segments of the market expand rapidly. Consumers are increasingly using mobile apps and digital wallets. If those wallets are linked directly to a bank account, it can cut out the card networks. A consumer who funds a PayPal wallet directly from a bank account, for instance, could bypass card networks in online transactions.
Kelly said that Visa is working with all the major payment apps and that the threat of “closed” digital wallets simply hasn’t materialized.
“There were a lot of concerns that closed wallet players were going to be a threat to the networks,” he said, “but most of them have gone from closed to open networks and they’re integrating Visa credentials into their wallets.”
Wall Street is still generally bullish on Visa; almost all analysts rate it a buy, according to FactSet, with an average price target of $264.
Peller, for one, still likes the stock, noting that Visa has multiple growth drivers to offset the competitive and regulatory pressures.
Visa Direct, a “push” payments system, is being used in new ways, like payouts of insurance claims or government stimulus checks. Visa is also developing technology to process and settle transactions in digital cryptocurrencies, including new ones that central banks are developing. “We’re working closely with central banks that are doing lot of thinking about cryptos,” Kelly said.
Peller estimates that Visa will generate year-over-year revenue growth in the second quarter above 20%, beating Visa’s guidance. He has an Overweight rating and a $275 price target.
Guggenheim Securities analyst Jeff Cantwell also likes Visa’s overall positioning and reopening drivers, though he doesn’t see as much upside in the stock due to valuation. Despite Visa’s lagging stock performance, the shares still trade at 36 times next 12-month earnings, well above its five-year average of 28.
“It looks fairly valued, absent a more material inflection in cross-border,” he said.
Write to Daren Fonda at [email protected]
